SEC revamping oversight of mutual funds

WASHINGTON For the first time in more than a decade, the Securities and Exchange Commission is preparing an overhaul of the regulations and laws governing the mutual fund business.

The move, a priority of the SEC's chairman, Richard C. Breeden, has set the industry against bankers, pension funds and insurance companies. They fear that a regulatory overhaul in which their financial products would be governed like mutual funds could ultimately make it more expensive for them.

About a dozen SEC staff members have spent a few months studying the rules and comments from a wide range of industries and specialists and are expected to make recommendations early in the new year.

"The goal is to allow for the development of new products without unnecessary impediments," said Marianne Smythe, the new director of the Investment Management division of the SEC "But we also don't want to do anything that would diminish the protection that investors enjoy under the existing law."

For 50 years, mutual funds have been regulated and their customers have been protected by the Investment Company Act. The detailed and highly complex statute was written under the guidance of William O. Douglas, who left the chairmanship of the SEC in 1939, a year before its passage, to become a Supreme Court justice.

The law was a response to the scandals during the 1920s and 30s on Wall Street, and it covered the industry in its infancy when it had about $400 million in assets.

Since then the mutual funds and other securities regulated by the act have swelled to $1 trillion in 58 million accounts. The commission's review is of all aspects of the law, from its limitations on fees and marketing, to its applicability to foreign companies.

The act and later amendments require such funds to be structured as companies instead of trusts, and mandate that 40 percent of the directors of each company be from outside the concern.

It also limits fees charged to customers, prohibits self-dealing by company officers, and gives the SEC a wide amount of control over many aspects of the business, including advertising.

For many lawyers, the Investment Company Act is a thing not to be understood but to be avoided, for the law's restrictions

sharply limit both the structure of a company and its latitude in engaging in a wide variety of business practices.

It is also the most complex of the federal securities laws.

"It is viewed as a pit, a trap, a Vietnam," said Matthew P. Fink, general counsel of the Investment Company Institute, the industry's main trade association. "It's like Moslem law. You want to stay away from it."

fTC But rather than advocate the repeal of the Investment Company Act, the association is strongly advocating that it be more widely applied. The law's application has thus become the main battleground of the review.

The mutual fund industry has taken the position that some types of pension funds, as well as mortgage-backed securities and credit card receivables that are sold as securities, fit in this category. In the spirit of fair competition, they contend, these securities and funds ought to be restricted under the same rules.